Innovation policies need to match globalrealities
David Webber*
COMMENT
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Innovation means new products, new technologies and new firms. No-one disputes the importance of these for creating jobs and economic wealth.
But howcan governments invest successfully in innovation in the new global economy?
Recent evidence suggests that New Zealand is not getting the formula right.Official reports,evaluations and Ministry for Economic Development data[1]point strongly toloweconomic returns on public investment in commercial research and innovation over the last 10 years.
At present, more than $500 million per year of taxpayer funds is spent on ‘commercial’ innovation – mainlyresearch and development (R&D) projects and business investment schemes that promise significant economic returns.
That is more than $5 billion dollars, in today’s money, over the last 10 years.
The government also spends a similar amount each year on non-commercial innovation - research on environmental issues, ecology, earthquakes, diseases, etc. This ‘public good’research may also be valuable, but generally hasfar fewer direct economic or commercial benefits.
Roughly two-thirds of spending on commercial innovationgoes to Crown Research Institutes (CRIs), universities and some private research organisations.A key aim is to draw in private sector investment that can develop the innovative processes, products or ideas that this research has uncovered.The remaindergoes mostly to small start-up companies or local firms (including foreign-owned subsidiaries) looking to expand new products or technologies.
Unfortunately, this spending is bringing in nowhere near the expected level of private investment, commercial expansion or economic growth. Recent analysis confirms that considerably higher returns could have been achieved with those funds simply by paying down government debt. In short, these interventions seem to be based on models of public research and private investment that no longer work.
In a recent article on government spending in science, the Prime Minister’s Chief Science Adviser, Dr. Peter Gluckman, stated,“... it is a waste of scarce resources to invest in policies and interventions that are not particularly effective” (Dominion Post, 19 April).
So what has gone wrong?
The limited effectiveness of much public funding of commercial innovation will surprise few in the business and R&D sectors. Innovation is a broadconcept, but an elusive policy target. Even for the private sector, turning smart ideas into significant, internationally competitive, commercial investments is complex, and the outcomes are unpredictable.
Despite their best efforts, government agencies invariably lack the skills, experience and information necessary tobuild innovation portfolios with a high proportion ofastute investments – for example in the bio-technology sector.In a prolonged quest for success, these programs have becomewide-ranging, non-strategic and costly.
To be fair, globalisation has changed the rules on how and where firms take good ideas to the market. This has affected New Zealand’s innovation environment in two ways.
First, it has changed significantly the form of commercial innovation. Especially for small economies, innovationnow seldom involves big leaps or ‘breakthrough science’. Rather, success depends on finding unique commercial opportunities to improve or enhance existing technologies and materials – think computers, cell phones, pharmaceuticals, agricultural inputs, industry processes, etc.
However, even incremental innovation requires intense product knowledge and investment capability, including an ability to respond rapidly (“do the R&D”) on new and short-lived market opportunities. Only the private sector can dothis effectively.
Second, innovations with high commercial potential commonly succumb to foreign ownership and (re)location.No feasible level of government assistancecanovercome the effects of these global market forces on major R&D and business development decisions, unless there are other substantial reasons, or advantages, in remaining here.
New Zealand is not alone in learning that changes to the way the private sector makes R&D and investment decisionshave rendered the traditional‘science push’ approach to innovation fundingobsolete. Many governments, including the United Kingdom, are now questioning the commonrhetoric of‘investing in innovation’.
Even in a supportiveeconomic environment, linking taxpayer-funded R&D to significant private investment is challenging. Institutional factors also contribute to thedisappointing outcomesfrom government funding.
Whilethe majority of publicly funded scientists in New Zealandare as good as any in the world, recent research by Malcolm Menzies[2] found they are rarely entrepreneurial. Moreover, the ‘technology transfer model’ used in most publicly funded research projects impairs research- business collaboration. Relatively fewNZ scientists are inclined, or encouraged, to target their research explicitly atcommercial interestsor private investors.
There are, of course, a very small number of exceptional individuals –truly great entrepreneurial scientists. However, theirdominancein much public discourse on commercializing science in this country – out of nearly 5,000 publicly-funded scientists nationwide – underlines the problem.
Commercial innovation relies on a powerful alignment of interests from initial research to final investment. This includes clarity of research direction, reasonable assurance of timely results, intense collaboration between scientists and business managers and clear ownership/control of intellectual property (IP). Most third-party (government) funding of research organisations fails these basic requirements.
Unfortunately, publicly funded researchorganisationshave been slow to reform. Attempts to generate financial incentives, or to create market-oriented conditions within the sector, have foundered on a lack of clarity in their research function and purpose.Instead, inflating the 'commercial potential' of research proposals has become an accepted tactic inbidding for public funds.
Attempts bypublicly funded research organisations to commercialisetheir research outputs have had mixed success.In general, the organisational culturesand governance structuresof CRIs and universities are unsuited tocommercialinvestment. Thishas given rise to some costly failures. CRIs especially havesincesettled for more limited,but less risky, revenues from licensing and sales of IP, often to foreign-basedinvestors.
For universities, most research responds firstto educational (public good) priorities and academic funding criteria, though efforts to commercialise innovation have increased in recent years. Large funding announced recently for genetic research at Otago,Aucklandand Massey universities shouldtest their ability to turn innovation into economic value.
Government funding fordeveloping local firms, or attracting and retaining foreign investment,is also challenging.In practice, highly promising business projects seldom need, or seek, government assistance. Bureaucratic procedures and compromised control of business decisions are anathema to successful entrepreneurs, but this leaves governments picking up the weaker projects.
Official data since 2001 provides very few examples of public funding leading to the development of large firms, much less to building significant,internationally competitive, industries. Even using public fundstoprevent successful private sector investments inthe software industrymoving off-shore nowlooksfinancially unsustainable.
Developing effective innovation policies requiresa reliable evidence base. Theeconomic strategies of the previous government - the so-called ‘growth and innovation framework’ and ‘economic transformation agenda’ –trumpeted the role of commercial innovation, but lacked specificity and failed to address global and local economic realities.
The present government’s ‘economic growth agenda’also remains largely undefined. This too maysimply fadetoambitions based on ‘world financial centres’, ‘knowledge societies’, ‘world class cities’or otherwishful thinking.Aspirations for doing better – returning to the top half of OECD standards of living, or achieving income equality with Australia – are fine, but aspirations are not a strategy.
In summary, the global context for innovation has changed radically, especially for small countries with limited resources. The need now is for innovation strategies that harnessthese new economic realities.
New Zealand needs a less costly, more pragmatic and better informed approach to generating commercial innovation andlinking it to private investment.This means less government spending but achieving more by focusing it oninnovation that expands investment in areas of proven competitiveness.
Successful innovation in non-traditional (including most high technology) industries requiresspecialised knowledge that the government does not have and investment that is beyond its fiscal means. However, government can provideprivate investors with better incentives for privately commissioned R&D, combined with more supportive business, tradeand regulatory environments.
Separating public spending oncommercial innovation from public good and educational researchis anessential first step for clarifying strategic objectives and funding policies. Connecting that funding to private investment in ways that sustain and extend areas of national competitive advantage is the next important stage.
Let’s stop swimming against the tide.
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David Webber is Managing Director of the Economics & Strategy Group Ltd and an innovation policy specialist. The opinions expressed here are his own.
1
[1] Economic Development Indicators 2011
[2] ‘Recognising Scientific Entrepreneurship in New Zealand”, Ph. D Thesis, VictoriaUniversity, 2008